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The biggest problem at the moment is the debt markets have almost completely stopped functioning. Let me repeat what the other poster said: “We are talking abou

The biggest problem at the moment is the debt markets have almost completely stopped functioning. Let me repeat what the other poster said: “We are talking about companies with plenty of assets and strong businesses”. And they still can’t get needed short term financing. Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed?

jkhdigital 7y ago
I'm not going to answer your question, but I'll just comment that moral hazard is real. Debt financing is not required to operate a business, but when liquidity is guaranteed through a lender of last resort companies will inevitably leverage their balance sheets far beyond what is justified by the underlying risk of the business. Also, is it really accurate to call a company "clearly creditworthy" if a 2-3 month gap in cash flow results in bankruptcy? Surely the CFO can get down on his knees and find some spare change under the couch cushions to get through this.
- icelancer 7y ago
  >> Debt financing is not required to operate a business Exactly. No one forced them to take on loans and then operate their balance sheets like they'd always be able to revolve bonds.
SilasX 7y ago
Well, yes, if you define "appropriately pessimistic bond markets" as "non-functioning", sure. These aren't sound businesses, because the current virus is going to screw them.
- perl4ever 7y ago
  This is circular reasoning, but it's also counter to the facts, which are that markets aren't yet pricing securities for an apocalypse.
  - SilasX 7y ago
    No, you're the one assuming they're functioning companies to prove that the deserve to be saved. That's itself circular. And if you think the market is correctly pricing the equity, you can't turn around and say it's mispricing the bonds so the Fed has to "correct it".
    - perl4ever 7y ago
      I didn't say the market is correctly pricing anything. I'm saying if it is correctly pricing securities, then it can't be used as evidence they are nonviable. I mean, circular reasoning is one level of stupidity, but getting it going with a counterfactual is just enraging to me.
mistermann 7y ago
> “We are talking about companies with plenty of assets and strong businesses”. We are also talking about companies with specious "assets" and incredibly fragile businesses. > Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed? No, but they are not all creditworthy. Do you happen to know the ratio between the two? It seems to me that is a rather important data point that a logical person should be examining as part of their decision making process.
icelancer 7y ago
>> Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed? There two major assumptions there. "Clearly creditworthy companies" and "Credit markets are temporarily closed" The bonds are devalued. People are issuing credit to those who qualify. (I've secured two LOCs myself for both my business and personal needs.) It's just that the bar is higher than normal. What is the function of a market if you don't allow it to clear?
bjourne 7y ago
If the companies are clearly creditworthy how come no one wants to lend them any money? It appears that whoever has the money doesn't think these companies are clearly creditworthy.
- perl4ever 7y ago
  It's circular reasoning. Why aren't you buying stocks or bonds? Presumably because nobody is offering you a large amount of extra money to do so, like with a 0% loan. Everybody who can get cash or has cash wants to prepare for zombies.

jkhdigital 7y ago

I'm not going to answer your question, but I'll just comment that moral hazard is real. Debt financing is not required to operate a business, but when liquidity is guaranteed through a lender of last resort companies will inevitably leverage their balance sheets far beyond what is justified by the underlying risk of the business. Also, is it really accurate to call a company "clearly creditworthy" if a 2-3 month gap in cash flow results in bankruptcy? Surely the CFO can get down on his knees and find some spare change under the couch cushions to get through this.

icelancer 7y ago
>> Debt financing is not required to operate a business Exactly. No one forced them to take on loans and then operate their balance sheets like they'd always be able to revolve bonds.

SilasX 7y ago

Well, yes, if you define "appropriately pessimistic bond markets" as "non-functioning", sure. These aren't sound businesses, because the current virus is going to screw them.

perl4ever 7y ago
This is circular reasoning, but it's also counter to the facts, which are that markets aren't yet pricing securities for an apocalypse.
- SilasX 7y ago
  No, you're the one assuming they're functioning companies to prove that the deserve to be saved. That's itself circular. And if you think the market is correctly pricing the equity, you can't turn around and say it's mispricing the bonds so the Fed has to "correct it".
  - perl4ever 7y ago
    I didn't say the market is correctly pricing anything. I'm saying if it is correctly pricing securities, then it can't be used as evidence they are nonviable. I mean, circular reasoning is one level of stupidity, but getting it going with a counterfactual is just enraging to me.

mistermann 7y ago

> “We are talking about companies with plenty of assets and strong businesses”. We are also talking about companies with specious "assets" and incredibly fragile businesses. > Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed? No, but they are not all creditworthy. Do you happen to know the ratio between the two? It seems to me that is a rather important data point that a logical person should be examining as part of their decision making process.

icelancer 7y ago

>> Should we let clearly creditworthy companies go bankrupt because the credit markets are temporarily closed? There two major assumptions there. "Clearly creditworthy companies" and "Credit markets are temporarily closed" The bonds are devalued. People are issuing credit to those who qualify. (I've secured two LOCs myself for both my business and personal needs.) It's just that the bar is higher than normal. What is the function of a market if you don't allow it to clear?

bjourne 7y ago

If the companies are clearly creditworthy how come no one wants to lend them any money? It appears that whoever has the money doesn't think these companies are clearly creditworthy.

perl4ever 7y ago
It's circular reasoning. Why aren't you buying stocks or bonds? Presumably because nobody is offering you a large amount of extra money to do so, like with a 0% loan. Everybody who can get cash or has cash wants to prepare for zombies.